Legal status - promotion, Business Law and Ethics

Legal Status:

A promoter is not an agent of the company he promotes. However, the English courts have held that he stands in a fiduciary relationship to the company he promotes, just as an agent stands in a fiduciary relationship to his principal: Re Leeds & Hanley Theatre of Variety (21).

Duties

In Gluckstein v Barnes (22) it was stated that a promoter is under a legal duty to disclose to the company any profits or financial benefits, that he derives from the promotion. In other words, he cannot make a secret profit out of the promotion just as an agent is not allowed to make a secret profit from the agency.

The disclosure to the company is made to:

(a) an independent board of directors that is not composed of, or dominated by, the promoters' stooges or cronies, failing which,

(b) the company's members (usually those invited by a prospectus to purchase the company's shares).

If a promoter fails to make the requisite disclosure the company may -

(i) repudiate any contract entered into between it, and the promoter, or

(ii) recover the secret profit from the promoter, as illustrated by Gluckstein v Barnes.